Sunday, December 25, 2016

Russia Cashes in on Oil Upswing

In a surprise development, Russia’s President Putin announced on state television that Swiss commodity trader Glencore Plc and Qatar’s sovereign wealth fund will be purchasing a 19.5% stake in Russia’s state oil company, Rosneft PJSC (MCX:ROSN), in a deal worth $11 billion. The Russian government, which owns approximately 70% of Rosneft, has been looking to reduce its stake in the company for most of the year to raise funds for its budget. (For More See: Russia Looking to Sell Stake in Rosneft)
Russia delayed the privatization of Rosneft in August 2016 because of the decline in oil prices during the summer. In October, however, Russian Economy Minister Alexei Ulyukaev said the privatization of a stake in oil major Rosneft would take place between November and December 2016. Analysts at the time estimated a 19.5% stake could fetch as much as $11.7 billion at current market valuations.

Russia’s Budget Growing

Russia’s finances are improving with the recent uptick in oil prices following OPEC’s decision to cut back oil production. According to VTB Capital, Russia’s budget is based on the assumption of oil at $40 per barrel, so prices at $55 per barrel could add about $15 billion to the state’s finances. Another Russian bank, Uralsib, said if oil prices are 15-25% higher than budgeted in 2017, the budget deficit will be reduced to 1.8% of GDP, compared to nearly 4% in 2016, as reported by Vedomosti.

Sanctions, What Sanctions?

The Rosneft sale comes at a time when both the U.S. and EU are maintaining economic and trade sanctions against some Russian companies and banks that have been in place since September 2014 in retaliation for Russia’s military incursion into Ukraine. Some economic sanctions are specifically intended to prevent Russia’s oil companies from raising financing needed to develop the country’s oil and gas sector. Technically there are no sanctions against the Russian government, but today’s deal leaves room for ambiguity depending on how the proceeds are used. Rosneft’s CEO Igor Sechin confirmed that “one of the largest European banks” will provide financing without specifying which one, according to Bloomberg. (See also: How Effective Are Russian Sanctions?)

The Bottom Line

Russia’s economy seems to be recovering with improving oil prices. The government did a good job of shoring up the country’s finances in the lean times and the central bank has effectively managed both interest rates and the country’s currency. The stake sale in one of the country’s flagship oil producer is also good public relations and shows that foreigners are still interested in investing in the country despite the challenges international sanctions present.
Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice.
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